Tech

How Uber can get close to profitability, according to one analyst

Key Points
  • To break even in the next three to four years, Uber needs steady growth outside of major cities while slightly reducing its costs per trip, Wolfe Research transportation analyst Dan Galves says.
  • "I think it's going to be tough," Galves contends.
  • Uber CEO Dara Khosrowshahi tells CNBC that it can obtain profitability without raising prices.
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Uber needs to grow outside of cities: Analyst

Dan Galves of Wolfe Research described Thursday on CNBC a path toward profitability for Uber, contending the ride-hailing service needs steady growth outside of major cities while slightly reducing its costs per trip.

"I think it's going to be tough," Galves said on "Power Lunch."

Specifically, Uber needs to increase its revenue by about 25% for the next four years and reduce costs per ride by 5% annually over that stretch, according to Galves.

"That would get them to break even," said the analyst, whose coverage area is automotive technology.

Uber reported second-quarter revenue of $3.17 billion.

But Galves questioned Uber's ability to meet his playbook if it cannot grow outside of eight linchpin cities, which account for nearly 60%t of Uber's U.S. revenue.

Those cities, Galves said in a later email are New York City, Boston, Philadelphia, Miami, Washington, Chicago, Las Vegas and San Francisco.

On average, those cities have about 1.1 vehicles per household versus 2.2 on average for the entire U.S., Galves wrote.

"It's extremely concentrated," Galves said on "Power Lunch." "We're just concerned that, if they can't find a way to build a business outside of the cities, it's going to be tough to generate another three to four years of that growth rate."

Galves' comments came on the same day Uber unveiled a host of updates to its app and services, including merging its ride-hailing and food delivery services into the same app while also adding features designed to improve security and encourage multimodal transportation.

Investor's have become increasingly skeptical about Uber's long-term path to profitability as its losses swell and growth wanes. Uber, which went public in May, has seen its stock lose roughly 25% of its value over the past three months. The shares closed down modestly Thursday at $31.57.

In August, Uber reported a net loss of $5.24 billion for the second quarter, largely due to stock-based compensation. Subtract that expense and Uber still lost $1.3 billion, wider than in the preceding quarter.

CEO Dara Khosrowshahi told CNBC in an exclusive interview Thursday that Uber could achieve profitability without raising prices. The company has long subsidized rides, keeping costs down for users in an attempt to gain market share.

"I think the company can scale. We can improve margins. We're looking at costs in every single part of the business," Khosrowshahi said on "The Exchange." "But I do think we have pricing power."

Khosrowshahi pointed to the fact that the cost of rides in New York City have recently increased about 15% — which Uber says is due to regulation designed to boost drivers' pay and reduce traffic congestion — but Uber continues to see growth.

In fact, Khosrowshahi said Uber's growth in New York City is mostly in boroughs outside of Manhattan, giving him optimism that the company can expand to entire metropolitan areas. That would check off one of Galve's boxes for Uber.

"In general, we find our services originate in the center of cities, but they actually grow far from the center," Khosrowshahi said. "We think that our business will grow outside of the city center, even if millennials start moving out of city centers as well."

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